Volcker Rule may be in for another delay

RonaldD. Orol

WASHINGTON (MarketWatch) — A top Federal Reserve official on Wednesday said he is “hopeful” that the Volcker Rule will be finished in 2013, which suggests the controversial regulation that seeks to limit speculative trading by big insured banks is being delayed yet again.

“It’s complicated as you know, we have basically five different agencies involved, we have 22 separate individuals, each of whom has a vote, none of whom works for anyone but themselves. This is a matter of taking some time to take everyone’s interest into account, to develop enough of a consensus that we can move forward,” said Federal Reserve Governor Daniel Tarullo in an interview on CNBC.

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Federal Reserve Board Governor Daniel Tarullo speaks during a joint hearing before the Capital Markets and Government Sponsored Enterprises Subcommittee and Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee January 18, 2012 on Capitol Hill in Washington, DC.

This time frame is much longer than Federal Reserve chief Ben Bernanke’s prediction in December that it was the intent of regulators to finish the rule “really early” in 2013. The proposal, which included roughly 200 pages of questions, was introduced in October, 2011.

However, almost a year-and-half later, the rule has not been approved. The regulation, is required by the Dodd-Frank Act, which was written in the wake of the financial crisis of 2008.

It requires five agencies, including the Federal Reserve and four others, to work together to write a rule, and so far having all the agency chiefs on the same page with the complex regulation appears to be difficult to achieve. Also, the Securities and Exchange Commission, a key agency involved in the regulation is in flux, with the Obama administration’s nominee to head the agency, Mary Jo White, awaiting confirmation by the Senate.

Also, there is the matter of bank lobbying, and concerns by bankers who suggest that firms and regulators may have a difficult time differentiating between legitimate market-making or hedging actions and prohibited, profit-making speculative proprietary transactions. Tarullo acknowledged that the separation of prohibited proprietary trading and legitimate market-making or hedging activities is not a “black or white” matter. “There are going to have to be judgements on the way,” he said.

Volcker himself, who helped craft the provision in the Dodd-Frank Act, said recently that such concerns about which trades are legitimate or not are baloney, and he expressed concerns that many bankers may have been involved in writing the questions attached to the proposal “not with the intent of clarity, but with the intent of obscurity.” Read Volcker talk about how banker concerns are baloney.

Tarullo defends ‘whale’ response

Tarullo also defended regulators and their response last year to the so-called “London Whale,” incident, where J.P. Morgan Chase & Co.
JPM, -0.79%
lost more than $6.2 billion trading credit derivatives. He said that regulators “can’t see everything” going on at big banks with 100,000 to 200,000 employees and that’s why it is important to have strong regulatory capital, liquidity requirements and monitoring which on-site teams provide.

He said that the Volcker Rule would have helped regulators with the J.P. Morgan loss had it been in place at the time.

“Had the Volcker Rule as we proposed it been in place a few years ago, at a minimum, the firm would have been required to document why what it was doing was hedging,” Tarullo said. “It would have had to have those reports, analyses available both to management and to regulators. At the very least there would have been a series of moments at which people had to really say, is this a hedge, what is the hedging strategy, does it create new risks.”

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